islamic development bank - idb microfinance experience

““Micro-Credit Financing and Poverty Alleviation in OIC Member States” 9-10 July, 2007, IstanbulMicro-Credit Financing and Poverty Alleviation in OIC Member States” 9-10 July, 2007, IstanbulPresentation by A. Slaoui Microfinance Specialist , Islamic Development BankPresentation by A. Slaoui Microfinance Specialist , Islamic Development Bank

IsDB IsDB MicrofinanceMicrofinanceExperienceExperience


Comprehensive

Human Development

Nafs (Self)

Maal (Wealth)

Aqal (Knowledge) Nasl (Posterity)

THE ISLAMIC VISION OF DEVELOPMENT

Maqasid Al-Shariah

Deen (Religion)

Islamic Financial Services Industry

Institutional Management of Wealth

Security & Basic Needs

PropertyHonourKnowledge

Higher Education

Science & Technology Education

Capacity Building

Nutrition & health

Fiduciary Duty

Sports

Environmental preservation

Means to an end

Research & Development

Moral Education

Transparency

Capacity Building

GovernanceProtection

JusticeValues


Significant resources potential for Islamic Microfinance Industry

1. More than 300 Islamic Financial Institutions

2. In over 65 countries

3. Managing assets of approximately US$ 1.0 trillion in Shariah compatible manner

4. More than 15% annual growth

5. Worldwide recognition


Need for an Islamic Microfinance Need for an Islamic Microfinance Development StrategyDevelopment Strategy

Over 3 billion people living on less than two dollars a day

Over 2/3 of world refugees are Muslims

Lowest Five among IDB member countries account for over half a billion (528 million) of the world’s poor (with incomes below $2 a day)

Lowest Ten account for over 600 million of the world’s poor

Among 500 million micro-entrepreneurs: currently Less than10%, i.e. 50 million, can access credit…

The informal sector represents over 60% of the active population of most developing countries

Over 7,000 Micro-Finance Institutions (MFIs) have difficulties to access the capital markets


IDB’s µFinance Current Strategy

Poverty alleviation thru provision of suitable and sustainable access to financing.

Capacity building

Nurturing entrepreneurship support at grass roots level

Introduction of Islamic financing modes


Main Features of IDB’s

Current µFinance Scheme

• Country eligibility: Low Income and LDMCs

• Mode of Financing: Loan – Service fee 0.75 to 2.5%

• Tenor: 25 to 30 years with 7 t0 10 grace period

• µproject investment: US$ 5,000 per project

• Maturity: 3-5 years

• Beneficiaries contribution: 10-20% of project cost


IDB Government

Central Bank

US$ account in commercial local bank

Revolving fund + 65% of markup

35% of markup (operational cost of

NGOs)

Financial Intermediary/NGO

Micro-entrepreneurs (in local currency)

External auditorsExternal auditors

Key:

Physical transfer money

Reporting to/instructing

LDMC loan at 0.75% for 30 yrs incl 10 yrs grace

US

$ at

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ax. 2

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24-30% pa (local

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20-22% pa (local currency)

Max 5 yrs in

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IDB µFinance Operations IDB µFinance ACHIEVEMENTS AND IMPACT


Balance of

The Poor’s Professional skills

The poor request to start his assistance with a:

Promotional Social Safety Interventions Package : (i) Literacy & Awareness, Counseling(ii) Vocational training & Skills upgrading,, career guidance, Management, (iii)Entrepreneurship & Business linkages promotion (Subcontracting, Franchising and

Clusters and collaborative production networks), (iv)Community Development Basic skills, (v) Other Poverty alleviation interventions such as Grants to education, house extension


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Counseling, Training Experiences Networking access to markets

The poor request mobilizing Package of Business Development Services


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Balance of The Poor’s Professional skills


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The poor request mobilizing

Package of appropriate Financial Services

VISION / STRATEGY / APPROACH

Balance of Poor Self-Sufficiency

Continuing on Skills Upgrading assistance


The poor request mobilizing

Package of appropriate Financial Services

Balance of Poor Self-Sufficiency

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VISION / STRATEGY / APPROACH


Role of Micro-grants in IDB Microfinance Operations

To Rebuild livelihoods Replace lost assets Overcome social isolation Gain productive skills Graduate to economic self-sufficiency

Helps groups: high-riskIn immediate Conflicts and Post conflicts environmentsIn severely disadvantaged rural areasIn intervention situation for the chronically destitute


Microfinance Projects Design and implementation mechanism

IDB may adapt Ready-to-Use Microfinance Frame work Package approach adopted CGAP consortium of donors.

More IDB involvement in early phase of Projects/Programs formulation

Investment in long-term programs in support of a few policy objectives rather than in short-term stand-alone projects

FROM IDB µFINANCE EXPERIENCE

18““Micro-Credit Financing and Poverty Alleviation in OIC Member States” 9-10 July, 2007, IstanbulMicro-Credit Financing and Poverty Alleviation in OIC Member States” 9-10 July, 2007, IstanbulPresentation by A. Slaoui Microfinance Specialist , Islamic Development BankPresentation by A. Slaoui Microfinance Specialist , Islamic Development Bank

IFS DEVELOPMENT PROGRAM : THE WAY FORWARD

Awqaf Sadaqa Zakat IDB Pov. All. Fund

Corporate Donations

Others

Comprehensive Human

Development

Community A Community B Community C

Individual

2

Individual

1

Individual

3

Individual

1

Individual

1

Individual

2

Individual

2

Individual

3

Individual

3

M I c r o f I n a n c e

IFS Development Fund

Other IFS


Understanding Understanding the Poor the Poor Rights & Rights & NeedsNeeds Asset Building, Risk

Mitigating Products

• Voluntary savings• Health and life insurance

Variety of Products

• Housing loans• Education loans• Life cycle products

Flexible financing Products

• Small initial loan sizes• Larger loans over time• Longer terms

No Collateral

Special Services &treatment

• Respect, connection with pertinent stakeholders

• Rapid response, and access to services

• Group guarantee

Promotional Social Safety Net Interventions

• Information, Counseling • Training, skills upgrading • Marketing Assistance • Technology devmt, transfer • Business linkages

Zakat applicable

Waqf applicable

Zakat &Waqf applic

ZA WAWA

ZWA

WA

ZA

ZWA

ZWA

ZWA

Lessons to be learnt from IDB experience


Making Economic Policies & Growth Pro-poor

Re-distributive policies (targeting the poor)• Providing Social Safety Nets to poor & marginalized groups

• Addressing Social barriers & issues facing women in economic development



Making Economic Policies & Growth Pro-poor

Targeted programmes and projects to enable the poor to benefit from economic growth through :•Labour intensive projects, •Telecommunications, electricity, roads, infrastructure, •Food security projects, post-conflict/reconstruction projects, •Environment sustainability and renewable energy, micro-credit, cross-cutting projects, etc.

Continued



Income of USD10 million Waqf @ 5% return, would provide average loans of $100 to 5000 Poor

“Zakat & Waqf Microfinance” efficiency

Appropriate risk management Mechanism should be established to protect the Waqf from decay.

Zakat, Takaful Funds may be the alternative,

.90,000 benefeciaries would be covered if

90% of the Waqf used in microfinancing.


Promote Islamic Microfinance Houses (IMH)

• Objectives: to complement the Comprehensive Human Development model by providing access to integrated Islamic Microfinance financial services to the poor in our member countries

•The Microfinance Houses Development Programme would initially entail a pilot project in 5 member countries for creating and/or strengthening existing Microfinance institutions.

Continued



The IMH would also undertake other interventions which would strengthen the livelihood of the poor, such as;

• Investments in public infrastructure, including roads, communications and education which provide a foundation for self-employment activities.

• Community-level investments in commercial or productive infrastructure (such as market centers or small-scale irrigation infrastructure) to facilitate business activity.

Continued



Rural (esp. agricultural) finance Services like microinsurance, leasing, and remittances

Social performance measurement

Defining the lower limits of viable microfinance and

Employing other interventions, including grants

Replicable strategies for unlocking country-level capital markets for microfinance

Role of donors relative to international equity and loan funds

Cost-effective and sustainable ways to combine non-financial development services with financial services


ISLAMIC FINANCIAL SECTOR DEVELOPMENT AND QWICK WINS MICROFINANCE INITIATIVES

IDB POVERTY ALLEVIATION FUND

THE ISLAMIC MICROFINANCE DEVELOPMENT FRAMEWORK


Model of an Ideal Islamic Bank Model of an Ideal Islamic Bank

A Universal Bank covering•Commercial Banking•Investment Banking•Advisory Services•Custodial Services•Asset Management•Zakat Management•Awqaf Development•Microfinance

This bank should be a vehicle for equitable distribution of wealth.


IDB’s Role in Islamic Financial Sector Development

IDB’s Role in Islamic Financial Sector Development

Recent Initiatives1. “Ten-Year Framework for Developing the IFSI”, Joint

Initiative 2. Establishment of a Policy Dialogue Working Group3. IFSI Development Technical support proposal4. IFSI Development Program

Previous Initiatives

Equity investments in IFIs Establishment of eight infrastructure institutions Research, training and technical assistance Development of financial products/funds (UIF, IBP) and Awqaf sector


Macro Perspective: Policy & Regulatory Macro Perspective: Policy & Regulatory FrameworkFramework

1. Provide Supportive Legal, regulatory and tax framework

2. Ensure Macroeconomic Stability

3. Keep Inflation in Check

4. Curb Speculative Forces in Financial Markets

5. Integrate Awqaf and Zakah in National Policy

6. Support Civil Society Efforts


1. Should there be Prudential Regulation for Non-deposit-taking MFIs?

2. Should Non-registered Entities be Prohibited from Lending?

3. How should Islamic MF be Separated from Conventional MF in a Dual System?

Macro Perspective: Policy & Regulatory Macro Perspective: Policy & Regulatory FrameworkFramework

Resolves the Unresolved Issues in Banking Sector Regulation and Supervision that Affect

Microfinance


1. Basic financial infrastructure, Range of services required to reduce transaction costs, increase outreach, build skills, and foster transparency

2. Payment Systems: Only large Islamic FIs have access to electronic payment systems

3. MFIs working for the poor may work through the larger Islamic FIs by forging alliances with them

Meso Perspectives: Infrastructure, Networks, Technical Service Providers

4. Transparency and Information: High-quality auditors and rating agencies, credit bureaus, reliable information software - scarcely available to Islamic MFIs

5. Existing MF-specific Agencies expand scope to include Islamic MF; or Existing Agencies for Mainstream IFIs to absorb MF services

6. Proactive role of Donors in Development of Islamic MF Rating


Diverse Organizational Structures: Informal MF Providers, Member-Based Organizations, Non-Government Organizations, Formal Financial Institutions, Commercial Banks

Micro Perspectives: Islamic Microfinance Providers

Diversity should be given due recognition in regulation

Need to Develop an Integrated Structure


Shariah Compliance

Shariah BoardsFiqhi IssuesDivergent PerceptionsConfidence of Users

Collective Resolution of Shariah Issues

Micro Perspectives: Islamic Microfinance Providers


RECOMMENDATIONS

Cooperatives-NGOs Efficient Management of Community Assets, Combine Social and Economic Agenda Effectively,

Islamic Financial Institutions

Recognize MF with Distinct Risk-Returns, Undertake Direct and Indirect Financing, Linkage with Grass-root NGOs, Facilitate Capital Market Participation of MFIs

Awqaf & Zakah Funds

Preserve and Develop Community Assets, Undertake TA, Transform the Destitute into “Bankable” Clients

Government Agencies

Create Supportive Policy and Regulatory Environment for IMFIs

Concerted Efforts by ALL Stakeholders to Make Finance Work in Muslim Communities through

Islamic Finance

islamic development bank - idb microfinance experience

Documents

worlds poor

poor requestto

productive skills graduate

sustainable access

islamic financial institutions

capital markets

yrs grace us

idb involvement